Question

Explain to a business owner who doesn't understand tax, in 3-5 sentences. Give examples and expand where necessary.

Explain the taxation of stock dividends both for a corporation and for an individual.

Answer 1

1) if you run your business as a sole propritorship, you generally pay personal income tax on the money you earn. As you expand and hire people, you have to withhold personal income tax from their pay as well as contributions for social security and insurance. That is called payroll and withholding tax.

2) Taxation of stock dividends for corporation

. Dividends distributed by the corporation are profits (part of the business net income) not business expenses and are not deductible. So the corporation pays corporate income tax on profits distributed to shareholders.

Taxation of stock dividends for individuals

At present, dividends are not subject to tax in the hands of shareholders, except for certain category of resident tax payers where dividend income exceeding RS.10 lakhs attracts an additional tax at the rate of 10% u/s 115BBDA of income tax act,1961.